Thursday, Credit Suisse initiated coverage of Potash Corp. of Saskatchewan, Inc. (POT) stock with a Neutral rating and a price target of $102.
Analyst Yip believes that POT has the brightest long-term outlook among the names in his fertilizer coverage universe, given the strong fundamentals and high returns in the potash industry. However, the near-term downside risks to potash volumes and pricing expectations limit stock outperformance over the next 12 months.
The analyst said that POT's aggressive potash expansion plans to more than double its capacity should position the company well to share in the strong projected long-term demand growth. POT's strategy of matching supply with demand means that its capacity will likely be underutilized in the earlier years, as numerous competitive capacity projects come onstream during the same timeframe.
However, for those investors with a longer time horizon, the analyst believes that POT offers substantial upside potential owing to the earnings potential from its planned potash capacity expansions. Owing to the diverse end-market exposure of POT's phosphate business, the earnings stream in this business tend to be more stable than those of its peers. For nitrogen, POT benefits from its low-cost natural gas source in Trinidad and from the more stable industrial exposure of its U.S. operations.
Based on the analyst's blended-valuation methodology that incorporates historical multiples, a sum-of-the-parts analysis, and a discounted cash flow analysis, he arrives at a price target of $102.
Currently, POT is up $0.60 or 0.59% and trading at $103.08.
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